For more information, see Burkina Faso and the IMF

The following item is a Letter of Intent of the government of Burkina Faso, which describes the policies that Burkina Faso intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Burkina Faso, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.
 
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Ouagadougou, December 11, 2000

Mr. Horst Köhler
Managing Director
International Monetary Fund
700 19th Street NW
Washington, D.C. 20431
U.S.A.

Dear Mr. Köhler:

1. On behalf of the government of Burkina Faso, and in the context of the second review of the program supported by an arrangement under the Poverty Reduction and Growth Facility (PRGF) approved by the Executive Board of the International Monetary Fund on September 10, 1999, I am pleased to send to you the memorandum of economic and financial policies for 2000/01. The memorandum describes progress made in implementing the program in 2000, updated targets for the rest of 2000 and for 2001, and the policies to be implemented to achieve these targets.

2. The 2000 program was implemented in a context of lower growth, owing to exogenous factors, notably a drought that led to a drop in agricultural output, the sharp increase in oil prices, and the instability in some countries in the subregion. Nonetheless, the quantitative benchmarks and indicators for end-June 2000 were met, with the exception of the indicator on the level of primary expenditure, which was breached because the rapid rate of commitment of government expenditure resulted in overruns on transfers to autonomous agencies and net lending. On the structural side, (i) compliance with the structural benchmark on the selection of an investment bank to prepare the privatization of ONATEL was delayed from end-May to end-December 2000 for procedural reasons; and (ii) the structural benchmark on the settlement of cross debts between the post office and the government was met with a four-month delay in November 2000.

3. The decline in economic growth, together with cuts in petroleum taxation to offset part of the significant increases in international prices, resulted in lower fiscal revenue at end-September 2000. In the event, none of the main quantitative benchmarks for end-September 2000 were observed (except those relating to not contracting nonconcessional loans, reducing domestic arrears, and not accumulating external arrears). These developments were also partly due to the improvement in budget execution, including through the setup of a fully computerized and integrated expenditure framework.

4. Faced with this situation, the government adopted a number of emergency measures to redress the deterioration of the fiscal stance, and the 2001 budget is within the original program parameters. The government remains resolved to implement all the reforms and measures contained in the program. It considers that the policies and measures described in the memorandum are appropriate to achieve its program objectives, but it will take any other measures that may prove necessary for this purpose.

5. As described in the memorandum, resources freed in 2000 from debt-service relief after reaching the completion point under the original Heavily Indebted Poor Countries (HIPC) Initiative, and interim financing obtained under the enhanced HIPC Initiative, have been allocated to the priority poverty reduction programs outlined in the poverty reduction strategy paper (PRSP) through the adoption of a supplementary budget law on November 2000. The government remains firmly committed to stepping up its efforts in this area and to reaching the completion point under the enhanced HIPC Initiative in the spring of 2001, as planned.

6. The government solicits the continued support of the International Monetary Fund to help it meet its program objectives, including through the conclusion of the second review under the PRGF. In any event, the Fund will, together with the government of Burkina Faso, complete a third review of the program supported by the PRGF by June 30, 2001 and a fourth review of the program by December 31, 2001, so as to monitor progress made in its implementation.

Sincerely yours
 
/s/

Jean-Baptiste Compaoré
Deputy Minister to the Prime Minister,
   in charge of Finances and the Budget
Ministry of Economy and Finance
Ouagadougou, Burkina Faso

 

 

 

 

 

Attachments: Memorandum of Economic and Financial Policies for 2000/01 and
Technical Memorandum of Understanding.

 

BURKINA FASO

Memorandum of Economic and Financial Policies for 2000/01

December 11, 2000

I. Implementation of the Program during the First Nine Months of 2000

7. Despite an unfavorable macroeconomic environment, which led to a slowdown in growth, Burkina Faso resolutely pursued the implementation of its program for 2000 supported by the Poverty Reduction and Growth Facility, as described in the memorandum of economic and financial policies of April 17, 2000. The government also started implementing the poverty reduction program laid out in its poverty reduction strategy paper (PRSP), including through a supplementary budget for 2000. This budget allocates to priority programs the savings on debt service obtained after reaching the completion point under the original Heavily Indebted Poor Countries (HIPC) Initiative and the interim financing received under the enhanced HIPC Initiative.

8. The combined effect of a decline in cottonseed production in 1999/2000, a depressed cereal harvest owing to the drought in the northern part of the country, a sharp increase in oil prices, and a drop in workers' remittances of Burkinabé residents abroad brought down real GDP growth in 2000. The consumer price index fell on a year-on-year basis by 0.9 percent in September 2000, reflecting weak demand and lower prices for foodstuffs, which offset some price increases resulting from higher oil prices.

9. At end-June 2000, revenue and expenditure were somewhat above target, and there was a significant increase in deposits of autonomous agencies at the treasury. All the quantitative benchmarks and indicators for end-June were met, except for the indicator on the level of primary expenditure, which was breached because of the rapid rate of commitments, including overruns on transfers to autonomous agencies and net lending (the latter consisting essentially of an emergency transaction for the purchase of electric generators). On the structural side, compliance with the end-May structural benchmark on the recruitment of an investment bank to handle the call for bids for the privatization of the telecommunications company (ONATEL) was delayed until end-December 2000, basically for procedural reasons outside the government's control; also, compliance with the structural benchmark on the final settlement of the cross debts between the post office (SONAPOST) and government was delayed, owing to the need to reconcile the data through end-June 2000. These debts were settled by the signing of an agreement on November 8, 2000.

10. The combination of the slowdown in growth and in consumption, worse than expected impact of the introduction of the WAEMU's Common External Tariff, and the cuts in taxation of petroleum products to soften domestically the impact of higher oil prices lowered tax revenues at end-September 2000 to CFAF 152 billion, slightly below the program target. While the corporate income tax (BIC) exceeded the target, on account of the increase in taxable profits of enterprises in 1999 and the new withholding tax introduced in January 2000, revenues from the value-added tax (VAT), consumption taxes, and customs duties remained below target. Owing to the rapid rate of commitments, primary expenditure reached CFAF 170.2 billion, significantly above the program target. Wage and salary outlays exceeded the target by approximately CFAF 6 billion, because of the payment of the full-year endowment to two ministries and of about CFAF 2.5 billion in retroactive wages related to the delay in the implementation of the final step of the civil service reform.1 Expenditure commitments for goods and services and transfers were also higher than programmed, and net lending exceeded the target, owing mainly to the emergency transaction for the purchase of electric generators mentioned above.

11. As a result, there was a primary deficit (excluding foreign-financed investment expenditure) of CFAF 18 billion at end-September 2000, compared with a programmed slight surplus. Also, notwithstanding the sale of two cellular telephony licenses that generated more than CFAF 12 billion in revenues, substantially exceeding anticipated privatization proceeds, net recourse to bank credit by the government totaled CFAF 27.3 billion at end-September, significantly above the target of CFAF 8.6 billion. Owing to these developments, none of the quantitative benchmarks and indicators for end-September could be met, except for the nonaccumulation of nonconcessional debt, the nonaccumulation of external arrears, and the settlement of domestic arrears. On top of the slowdown in growth, these unfavorable trends reflect seasonal effects and the sustained effort of the government to step up the level of expenditure commitments.

12. The money supply grew by 3.9 percent between end-December 1999 and end-September 2000. The expansion of credit to the economy, while slowing considerably in the third quarter, remained strong, primarily because of the delay in the repayment of crop credits. Following the increase in euro interest rates and rapid growth in credit to the economy in the monetary zone in June 2000, the central bank raised its key rates by ¾ of 1 percentage point to 6.50 percent for the discount rate and 6 percent for the repurchase rate. Also, competition among banks increased as a result of the entry into the market of three new banks during the past two years, leading to a narrowing of interest rate spreads.

13. Although still at low levels, nonperforming loans increased from 1.7 percent of total loans at end-December 1999 to 3.15 percent at end-June 2000. This deterioration was mainly due to the National Agricultural Bank (CNCA), which was hit by the poor cotton harvest in 1999 and saw its capital position deteriorate substantially at end-June 2000. This bank has adopted a policy of restructuring and diversifying its loans to improve its portfolio. More generally, compliance with the West African Monetary Union (WAMU) prudential ratios improved between December 1999 and June 2000. All of the seven banks making up the sector complied with the capital adequacy ratio at end-June. However, the banks continue not to comply with the risk diversification ratio because of the weight of the cotton sector in the Burkinabé economy. There was further progress in the development of microfinance institutions (the network of credit unions and others) with the creation of 85 new structures in 1999. However, despite the current keen interest in this sector, microfinance remains concentrated in a small number of medium-sized and large structures.

II. Objectives and Policies for the Remainder of 2000

14. Real GDP growth is now estimated at 4 percent in 2000, as against an initial forecast of 5.7 percent. The lackluster agricultural performance, in particular, is expected to lower the primary sector growth to 2.6 percent. The secondary sector has been buoyed by good performance in manufacturing, construction, and public works. Industrial activity has been stimulated in particular by the start-up of new cotton processing plants (spinning and waste reclamation) and investments in the brewing industry. Activity in the tertiary sector is projected to rise by about 4 percent. Consumer prices are projected to decline by an annual average of 0.2 percent for 2000, and the GDP deflator by 1.6 percent. On the use side, a significant drop in public investment is expected, owing mainly to the limited mobilization of external assistance, but private investment is projected at 13.3 percent of GDP, compared with 11.9 percent of GDP in 1999.

15. Exports are projected to grow by 3.6 percent in value terms, with the decline of cotton exports offset by a rebound of exports of manufactured goods. A slight drop in imports is expected. The resulting improvement in the trade balance is, however, partly offset by a significant drop in workers' remittances. The current account deficit, excluding capital grants, is estimated at 14 percent of GDP in 2000, compared with 14.9 percent of GDP in 1999. Capital grants included, the current account deficit is projected at 10 percent of GDP in 2000, slightly better than the program target. Nonetheless, the projected low levels of budgetary assistance will lead to a larger overall deficit and a decline in official reserves estimated at about CFAF 22 billion.

16. The objective of fiscal policy for the remaining few months of 2000 is to correct the deviation of the fiscal stance at end-September through the adoption of a number of measures to curtail expenditure. Revenue is forecast at approximately CFAF 225 billion for the full year, or 13.8 percent of GDP, compared with a target of 14.4 percent of GDP. Domestic expenditure for 2000 will be kept below program projections. The overrun on wages and salaries at end-September will be curtailed as it reflected advance payment of salaries for certain categories of personnel. The overrun on the program target will be limited to CFAF 2.2 billion (0.1 percent of GDP) by year-end, mainly due to the above-mentioned payment of retroactive wages (CFAF 3 billion for the year). The last step of the civil service reform was delayed because of unanticipated difficulties in introducing the interconnections between the payroll and the civil service databases, which should now be finalized by June 2001. The overruns on expenditure on goods and services and transfers at end-September will be reversed by year-end as these outlays will be strictly limited to the programmed budgetary appropriations, through a freeze on new commitments implemented in mid-November. At the same time, the government will implement an immediate cut of CFAF 4.5 billion in commitments on domestically financed investments while protecting the priority sectors. On a commitment basis, the share of expenditures (excluding external financing and use of HIPC Initiative resources) allocated to the health and education sectors in 2000 will total 12.4 percent and 16.9 percent, respectively, slightly exceeding the program targets (Table 2). Domestically financed investment outlays are projected to be below the programmed level, owing in particular to the lower level of foreign financing.

17. Excluding the use of the HIPC Initiative resources, the primary deficit is targeted at CFAF 5 billion in 2000, compared with a programmed surplus of CFAF 7.4 billion (a differential equivalent to 0.7 percent of GDP). The downward revision in the level of disbursement of project grants will lead to a significant drop in foreign-financed investment expenditure. The overall deficit (on a commitment basis, excluding grants) should narrow to CFAF 162 billion (9.9 percent of GDP), below the programmed level of 11 percent of GDP. Including grants, however, the overall deficit (cash basis) is projected at CFAF 77.1 billion (4.7 percent of GDP), compared with a programmed deficit of CFAF 56 billion. This will result in a slightly higher than initially anticipated recourse to bank financing. As a result, the revised performance criterion on the change in net bank credit to the government for December 2000 was set at CFAF 18.7 billion (1.1 percent of GDP).

18. Resources made available in 2000 through debt-service relief under the HIPC Initiative are estimated at CFAF 10.3 billion. They have been allocated to the priority poverty reduction programs outlined in the PRSP through a supplementary budget law adopted on November 29, 2000. The outlays are expected to be fully committed by February 28, 2001.

19. The government ensured a prompt payment of its water, electricity, and telephone bills in 2000 and does not expect to incur payment delays in this area before year's end. It also consolidated all remaining amounts owed by the government and its constituent parts, particularly the local governments, to these utilities for a total of CFAF 21.9 billion, which will be securitized by December 31, 2000. Also, with a four-month delay compared with the program timetable, an agreement was signed with the post office (SONAPOST) on November 8, 2000 for the payment of the remaining balance owed by the government (about CFAF 2.9 billion) after the offsetting of cross debts.

20. The money supply is projected to grow by about 3.4 percent in 2000. Domestic credit is expected to increase by about 19 percent as a result of the rise in net credit to the treasury of CFAF 20.9 billion (5.4 percent of the beginning-of-period money stock), and in credit to the economy of about 12 percent. After delays in the first half of the year, the repayment of crop credits was proceeding normally at end-September. Official exchange reserves are projected to decline by about CFAF 22 billion for the year, but Burkina Faso's contribution to the foreign assets of the Central Bank of West African States (BCEAO) remains quite comfortable.

21. In the area of structural reforms, substantial progress was made in the privatization program in 2000. The tomato juice and concentrate production company (SAVANA) was liquidated in February 2000. The equipment rental company (SLM) was sold in July. The call for bids for the privatization of the railroad hotels company (SHG) was launched in November 2000. The property management and construction company (SOCOGIB) was sold to the Social Security Fund. The national airline (Air Burkina) was sold to a strategic partner, which is expected to take over operations in early 2001. Likewise, a consultant is being recruited to facilitate the privatization of the management of Ouagadougou and Bobo-Dioulasso airports. Finally, the restructuring of the postal checking system and savings bank (CCP/CNE) is close to finalization.

22. In the context of the liberalization of the telecommunications sector, two mobile cellular telephony licenses were awarded to private operators in the spring of 2000. The privatization of ONATEL is being pursued, although with some lag in the original timetable. The provisional audit report was submitted on schedule. An analysis of the technical bids for the recruitment of an investment bank to assist the government with the privatization was completed. Having received the World Bank's notice of no objection, the government will do everything in its power to find financing and recruit the investment bank by December 31, 2000. Completion of this recruitment is a prior action under the program. Also, as scheduled, the Council of Ministers will adopt by December 2000 the letter of development policy of the energy sector, which includes the regulatory framework for the electricity sector and SONABEL's privatization scheme (this constitutes a structural benchmark under the program).

23. Concerning the reform of the cotton sector, the producers' organizations are assuming an active role in the management of SOFITEX, and the possibility of transferring an even larger portion of the company's capital to them is being reviewed. The opening of the eastern zone to new producers has met with limited success so far, owing to the prevailing low prices, but the outlook remains good. As soon as circumstances permit, SOFITEX will sell the ginning plant in this zone. The government also plans to open the central-southern zone, where SOFITEX has two ginning plants, to private operators. As a result of its efforts to contain expenses, including subcontracting almost all transport to the private sector, SOFITEX has been able to balance its books for the 1999/2000 crop year.

24. The fully computerized integrated public bookkeeping system was launched early in 2000. It includes the regional treasury offices, and allows for a streamlined budget execution and improved control mechanisms. The National Good Governance Plan adopted in 1998 is gradually being implemented, in particular with the setup in October 2000 of the Executive Secretariat and forums for consultations among the government, the private sector, and civil society. In this connection, the audited budget acts (lois de règlement) for 1995 to 1998, which are being finalized, will be adopted by March 2001; this constitutes a performance criterion under the program. Progress was made in reforming the judiciary in 2000. Institutionally, the Supreme Court was broken up into four entities (Council of State, Constitutional Court, Audit Office, and Court of Cassation); the Ouagadougou court registry offices were computerized; and computerization of criminal procedures has also been completed, while that of civil procedures is in progress.

III. Objectives and Policies for 2001

25. Following the downturn in 2000, an economic recovery is expected in 2001, the early signs of which are already perceptible in late 2000. This recovery is based on a predicted rise in cotton output and prices, and an upturn in cereal production. Overall, agricultural output is projected to increase by 8 percent. Public investment should rebound, and value added in the secondary and tertiary sectors could increase by 7.4 percent and 4.8 percent, respectively. As a result, real GDP is projected to grow by 6.2 percent, slightly below the initially anticipated 6.6 percent. The recovery in the agricultural sector should continue to dampen prices for foodstuffs, and as a result inflation should not exceed an annual average of 2 percent.

26. As regards the balance of payments, a strong upsurge in exports is expected in 2001, owing to the anticipated recovery in the cotton sector and the continued upswing in the manufacturing sector. Imports are also expected to grow, reflecting a revival of externally financed investment. The current account deficit, excluding capital grants, should increase to 15.3 percent of GDP in 2001 (11.3 percent, including grants), compared with 14 percent in 2000. Despite the expected continued low level of workers' remittances, significant external support will result in an increase in official reserves estimated at CFAF 30 billion. In the medium term, the external current account deficit should show a declining trend, mainly owing to the coming onstream of new cotton production zones and the expected upturn in cotton prices.

27. The objective of the 2001 fiscal policy is to strengthen the budgetary position in order to reverse the poor performance in 2000 and to revert to the originally programmed objective of reducing domestic bank financing. In line with these objectives, the government adopted a number of new tax measures in the context of the 2001 budget law, expected to yield 0.6 percent of GDP and to improve tax administration:

  • The withholding tax2 will be deferred until goods of industrial units leave the bonded warehouses.

  • For social reasons, the rate for the withholding tax2 on cola nuts is being lowered from 2 percent to 1 percent.

  • The rate for the withholding tax2 is being lowered from 5 percent to 1 percent for entrepreneurs in the public works and construction sectors, which should lead to better taxpayer compliance (because of retention, very little was collected at the higher rate in 2000).

  • In line with the harmonization of domestic taxation in the West African Economic and Monetary Union (WAEMU), and in compliance with the requirements of the Code of the Interafrican Conference on Insurance Markets (CIMA Code), the tax rate on fire insurance contracts is being lowered from 30 percent to 20 percent.

  • To increase compliance in the area of real estate taxes, the system of taxation based on income considered on a contract-by-contract basis is being reintroduced; the tax schedule is being revised downward; and the exemption applied to income from new construction is being increased from 25 percent to 30 percent. To cover the shortfall, measures have been taken to annualize the tax payments.

  • To comply with the WAEMU directive on the harmonization of excise duties, differentiated excise duties on tobacco products based on imports or locally produced tobacco will be abolished. The new rates differentiate by type of product: 17 percent for low-end products and 22 percent for high-end products. This represents a significant increase in average duties.

28. Moreover, the government has decided to eliminate the surtax on sugar, to bring its legislation in line with the temporary protection measures under WAEMU's common external tariff (CET). To increase returns, it plans to return the collection of the tourism development tax from the tourism agency to the tax authorities. Also, to shorten the frequent delays in commitments, the government will strictly enforce compliance with the annual budget cycle for investment expenditure.

29. The sharp increase in petroleum prices in 2000 revealed the weakness of the existing mechanism for setting the prices and taxation of petroleum products. Hence, the government has decided to change the system of taxation of these products by December 31, 2000 and also plans to introduce a monthly automatic and transparent adjustment of retail prices in line with international prices by March 31, 2001. The current system of import duties, based on notional values, a single tax on petroleum products (TUPP), and cross-subsidization among products, will be replaced, in line with the WAEMU guidelines, by the CET, which will be based on transaction values, and a specific excise tax (tax on petroleum products-TPP) set once a year, all subject to the VAT at the normal rate. Existing subsidies will henceforth be budgeted as expenditures, with those on fuel deliveries for electricity generation to SONABEL classified as transfers, and those of butane gas as social expenditure.

30. Taking the above measures into account, the outlook for public finances for 2001, including the HIPC Initiative resources (CFAF 25.1 billion, or 1.4 percent of GDP) and their use, is generally in line with the program objectives. Total revenue is projected at CFAF 251 billion, or 14.4 percent of GDP, in line with the program. Current expenditure is budgeted at CFAF 220 billion (12.6 percent of GDP). The wage bill is expected to increase by 3.8 percent, in line with the normal wage drift. Current transfers are budgeted at a relatively high level, mainly because of a provision of more than CFAF 5 billion in VAT refunds owed to SOFITEX. The government will pursue its policy initiated in 2000 of promptly paying its water, electricity, and telephone bills and will incur no further arrears in this area. As a result, the basic deficit3 is projected at CFAF 50 billion (2.8 percent of GDP), compared with 2 percent of GDP in 2000, and the overall deficit (on a commitment basis, excluding grants) at 13.4 percent of GDP, compared with a deficit of 10.6 percent of GDP in 2000. Including grants, the overall deficit (cash basis) is projected at 6.0 percent of GDP, compared with a deficit adjusted for HIPC Initiative expenditure of 4.6 percent of GDP in the original program. However, the anticipated mobilization of significant amounts of project and program lending and of the HIPC Initiative resources will make it possible to abide by the original program projection of a slight decline in net credit to the banking system.

31. Given the importance of regional integration for a landlocked economy such as Burkina Faso, the government will do the utmost to abide by WAEMU regulations. In particular, it will endeavor to ensure compliance with the convergence criteria by end-2002. As two convergence criteria (the ratio of tax receipts to GDP and the ratio of external current accounts (excluding grants) to GDP) are unlikely to be met by that date, the authorities are committed to implementing the necessary policies to abide by these criteria as soon as possible. Also, having already achieved significant progress in this area, the government will continue to amend its national legislation to respect WAEMU's five directives on tax administration.

32. The monetary policy conducted by the BCEAO will continue to be targeted at improving the net foreign asset position of the zone and maintaining an inflation rate compatible with that of the anchor currency. The expansion of the money supply in 2001 is projected at about 7.2 percent, in line with the nominal GDP growth rate; a relatively modest increase in credit to the economy is also expected. As indicated above, Burkina Faso will make a positive contribution to the foreign assets of the WAMU. The targets for end-March and end-June 2001 for net bank credit to the government are presented in Table 1 attached. In addition, efforts to strengthen the banking system will continue, especially by increasing the capital of banks, which will endeavor to respect the new prudential ratios established by the WAMU.

33. Statistical data. As part of the national strategy on statistical data, the government will continue to improve the quality of the national accounts and other economic statistics. After some delays, the final national accounts for 1994 through 1998 will be published before year's end. Likewise, the harmonization along WAEMU guidelines of the industrial production index will be completed in 2001. This new index will take account of the results of the most recent industrial and commercial survey, which was conducted in March 1998.

34. The privatization program will be pursued in 2001. The national film company (SONACIB) was placed under provisional administration pending its liquidation. The textile company (FASO FANI) is also under provisional administration pending a decision on its fate before end-2001. The privatization of the national agricultural equipment center (CNEA) will be revisited after its merger with APICOMA. The privatization of ONATEL should be completed by end-June 2001. In accordance with the strategy defined in cooperation with the World Bank, the program for the privatization of SONABEL and the opening of the capital of SONABHY to private investors will be pursued in two phases, namely an audit followed by a diagnostic study and evaluation of assets, to be carried out jointly in 2001 before their respective privatizations planned for end-2002. At the end of these operations, 47 enterprises, representing 86 percent of the government's initial portfolio, will have been liquidated or sold. The remaining 20 public enterprises consist mainly of public or social services entities. Based on an audit report examining the financial state of these 20 enterprises, the government will take appropriate decisions.

35. Reform of the civil service is ongoing, and the new merit-based promotion system will start up as planned on January 1, 2001. During the coming two years, the administrative structure will be further reformed to standardize the central and decentralized structures of the government and increase productivity. Particular emphasis will be placed on policies on decentralization and delegation of authority, including the need to transfer human resources.

36. The government will continue its efforts to create an environment favoring the development of the private sector, notably through the setup of an "entrepreneur house," the continued modernization of the consular chamber, and the simplification of formalities linked to investments and the creation of enterprises. The considerable efforts that have been made to strengthen the judicial system will be pursued, with a view to providing a more secure environment for investments and promoting good governance. With the necessary structures in place, the implementation of the national good governance plan should be accelerated, especially by providing support to the legal and institutional reforms of government structures, civil society organizations, and the promotion of the private sector.

IV. Poverty Reduction and Social Sectors

37. In June 2000, the government presented its poverty reduction strategy through its poverty reduction strategy paper (PRSP). This strategy aims to achieve a number of fundamental objectives: (i) to accelerate growth on an equitable basis; (ii) to guarantee access to basic social services for the poor; (iii) to promote job opportunities and income-generating activities for underprivileged segments of the population; and (iv) to promote good governance. The government's efforts in this area continue to yield positive results: notably, child vaccination targets set for the end of the year had nearly been achieved as of end-June 2000, and even surpassed as regards tuberculosis. Also, the government has adopted ambitions targets to be achieved in 2001 (Table 2).

38. The Executive Boards of the International Monetary Fund and World Bank examined in June - July 2000 the authorities' strategy as outlined in the PRSP. However, the relatively long time needed to finalize the rescheduling agreements under the HIPC Initiative delayed the adoption of the supplementary budget law and ensuing allocation of resources to priority sectors until November 29, 2000. Nevertheless, to comply with the timetable for reaching the completion point under the enhanced HIPC Initiative, the government will do everything it can to accelerate the commitment of these expenditures.

39. The government decided to manage the use of the HIPC Initiative resources through a special account opened with the treasury. This will, inter alia, allow the carry forward of outstanding balances to the following fiscal year. In addition, to release funds in a timely fashion, annual allocations resulting from debt-service relief will be committed in their entirety at the start of each year. Tracking procedures will be put in place quickly, both centrally and in the regions, to ensure that funds are used properly in the context of the program and to monitor the outcomes. In addition, the government will endeavor to eliminate the past delays in the commitment of budgetary appropriations in the health and education sectors.

40. During the start-up phase of the program, implementation of the strategy on a decentralized basis is one of the main challenges faced by the government. The National Soil Management Program (PNGT2), supported by the World Bank, promotes the increased devolution to rural communities of full responsibility for managing local development, particularly the natural resources that constitute the essential productive base for the people. Also a special effort is being made, notably for the social sectors, to expand the delegation of budgetary authority, which allows districts to manage funds through the devolution of appropriations to them.

41. The government is pursuing the implementation of the other measures of the PRSP. For the health sector, in addition to the delegation of authority that allows sanitary districts to manage budgetary appropriations, a pilot program has been implemented in the framework of the health and nutrition program supported by the World Bank. The latter involves, for all the health districts, the provision of resources on the basis of a signed contract, with progress indicators defined in advance. An assessment of this experiment, currently under way, will make it possible to better assess its strengths and weaknesses and to institutionalize the process. In the area of education, the recruitment of teachers in line with the overall civil service reform is being pursued, and the transfer of responsibilities for a decentralized school management is ongoing, as are the education reforms aimed at lowering repetition rates.

INTERNATIONAL MONETARY FUND

BURKINA FASO

Technical Memorandum of Understanding

December 11, 2000

1. This memorandum provides the definitions of the performance criteria and benchmarks of the program supported under the Poverty Reduction and Growth Facility (PRGF) of the International Monetary Fund (IMF). It also sets out the data-reporting requirements for monitoring the program.

I. Definition of Terms

2. For the purpose of this memorandum, the following definitions of "debt," "government," "payment arrears," and "government obligation" will be used:

  • As specified in point 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt adopted by the Executive Board of the IMF on August 24, 2000,4 debt will be understood to mean a current, that is, not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. Debts can take a number of forms, the primary ones being as follows: (i) loans, that is, advances of money to obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans, and buyers' credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements); (ii) suppliers' credits, that is, contracts where the supplier permits the obligor to defer payments until some time after the date on which the goods are delivered or services are provided; and (iii) leases, that is, arrangements under which property is provided that the lessee has the right to use for one or more specified period(s) of time which are usually shorter than the total expected service life of the property, while the lessor retains the title to the property. For the purpose of the guideline, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement, excluding those payments that cover the operation, repair, or maintenance of the property. Under the definition set out above, debt includes arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt. Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.

  • Government is defined as the government of Burkina Faso and does not include any political subdivision or central bank or any government-owned entity with a separate legal personality.

  • External payment arrears are external payments due but unpaid. Domestic payment arrears under the program for 2000 include domestic payments that are due on account of retroactive wages under the civil service reform (transition to a new wage structure) but unpaid. They also include domestic payments due (following the expiration of a grace period of 60 days, except where the obligation provides for a specific grace period, in which case that grace period will apply) but unpaid.

  • Government obligation is any financial obligation of the government recorded as such by the government (including any government debt).

II. Quantitative Performance criteria

A. Cumulative Change on Net Bank Credit to Government

Definition

3. Net bank credit to the government for the purposes of the program is defined as the balance of the Burkinabé Treasury's claims and debts vis-à-vis national banking institutions. Treasury claims include the cash holdings of the Burkinabé Treasury, deposits with the central bank, deposits with commercial banks, and secured obligations. Treasury debt to the banking system includes funding from the central bank (essentially IMF financing and refinancing of secured obligations), government securities held by the central bank, funding from commercial banks (including government securities held by commercial banks), and deposits with the postal checking system.

4. Government securities held outside the Burkinabé banking system are not included in the net bank credit to the government.

5. Net bank credit to the government is calculated by the Central Bank of West African States (BCEAO), whose figures are those deemed valid within the context of the program.

6. As of December 31, 1999, the net government position thus defined was CFAF 105.1 billion. At end-June 2000, the cumulative change on net bank credit to government so defined was CFAF 19.3 billion.

Performance criterion/benchmark

7. The ceiling on the cumulative change on net bank credit to the government is set at CFAF 18.7 billion as of December 31, 2000. This ceiling is a performance criterion. The stock of net bank credit to the government is programmed at CFAF 123.8 billion at end-December 2000. The ceiling on the cumulative change on net bank credit to the government is projected at minus CFAF 1 billion at March 31, 2001, minus CFAF 2.4 billion at June 30, 2001, minus CFAF 3.4 billion at September 30, 2001, and at minus CFAF 4.1 billion at December 31, 2001. These numbers will be set as benchmarks for end-March 2001, and as performance criteria for end-June 2001 during the third review under the program, and as benchmarks for end-September 2001 and as performance criteria for end-December 2001 during the fourth review under the program.

Adjustments to performance criteria/benchmarks

8. This ceiling on the cumulative change on the net bank credit to the government position vis-à-vis the banking system will be subject to adjustments if disbursements of external budgetary assistance, including traditional debt relief—but excluding the assistance to be provided under the Initiative for Heavily Indebted Poor Countries (HIPC Initiative)—exceed or fall short of program forecasts. In the event of excess disbursements at the end of each quarter (end-December 2000, end-March 2001, end-June 2001, end-September 2001, and end-December 2001), the ceiling will be adjusted downward pro tanto by the amount of the excess disbursements. In contrast, if at the end of each quarter disbursements are less than the programmed amounts, the ceiling will be raised pro tanto by the amount of the shortfalls up to the limits (on a noncumulative basis) of a maximum of CFAF 12 billion at end-December 2000, a maximum of CFAF 4 billion at end-March 2001, a maximum of CFAF 7 billion at end-June 2001, a maximum of CFAF 12 billion at end-September 2001, and a maximum of CFAF 20 billion at end-December 2001. Regarding the HIPC Initiative assistance granted to Burkina Faso, the debt-service savings will be transferred to a special account at the treasury to provide allocations for poverty reduction programs in line with the poverty reduction strategy paper (PRSP), as specified in the supplementary finance law for 2000 and the 2001 finance law.

Reporting requirement

9. Detailed data on the net government position will be provided monthly within six weeks following the end of each month.

B. Reduction of Domestic Payment Arrears on Government Obligations

Definition

10. Domestic payment arrears on government obligations are reduced through the payment of these obligations as defined under paragraph  2 above. The government undertakes not to accumulate any new domestic payment arrears on government obligations on a net basis. The treasury keeps and updates the inventory of domestic payment arrears on government obligations and maintains records of their repayments.

Performance criteria

11. The government undertakes to reduce domestic payment arrears on retroactive wage payments by CFAF 3 billion for calendar-year 2000, and will not accumulate any further domestic payment arrears on government obligations in 2001. The payment is a performance criterion for end-December 2000, and the nonaccumulation is a benchmark for end-March 2001 and a performance criterion for end-June 2001.

Reporting requirement

12. Data on the outstanding balance, accumulation, and repayment of domestic payment arrears on government obligations will be provided monthly within four weeks following the end of each month.

C. Reduction of External Payment Arrears

Performance criterion

13. Government debt is outstanding debt owned or guaranteed by the government. Under the program, the government undertakes not to accumulate external payment arrears on government debt, with the exception of external payment arrears arising from government debt being renegotiated with creditors, including Paris Club creditors. The nonaccumulation of external payment arrears on government debt is a performance criterion to be observed continuously.

Reporting requirement

14. Data on the outstanding balance, accumulation, and repayment of external payment arrears will be provided monthly within four weeks following the end of each month.

D. External Nonconcessional Loans Contracted or Guaranteed
by the Government of Burkina Faso

Performance criterion

15. The government will not contract or guarantee external debt with original maturity of one year or more with a grant element of less than 35 percent (calculated using the reference interest rates corresponding to the loan currency as supplied by the IMF). This performance criterion applies not only to debt as defined in Point 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt adopted on August 24, 2000,5 but also to commitments contracted or guaranteed for which value has not been received. However, this performance criterion does not apply to financing provided by the Fund.

Reporting requirement

16. Details on any external government debt will be provided monthly within four weeks following the end of each month. The same requirement applies to guarantees extended by the central government.

E. Short-Term External Debt of the Central Government

Performance criterion

17. The government will not contract or guarantee external debt with original maturity of less than one year. This performance criterion applies not only to debt as defined in Point 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt adopted on August 24, 2000, but also to commitments contracted or guaranteed for which value has not been received. Excluded from this performance criterion are short-term ,import-related trade credits. As at September 30, 2000, the government of Burkina Faso had no short-term external debt obligations.

F. Structural Performance Criteria

Performance criteria

18. There will be a reform of the taxation on petroleum products by December 31, 2000 that will include (i) a customs duty applying the common external tariff (CET) rates of the WAEMU based on the valuation of petroleum imports at their actual import value (and not according to administratively set values); (ii) a specific tax (tax on petroleum products), positive or nil, which will be adopted by the parliament for every product; and (iii) a value-added tax (VAT) in accordance with the standards of the WAEMU on VAT. Any subsidy that the Burkinabé authorities would set up, either on products supplied to the electricity company (SONABEL) for the production of electricity or on butane gas, should be explicitly recorded under government expenditure and budgeted as such.

19. An automatic, transparent monthly system for setting retail prices of petroleum products and of butane gas to reflect changes in international prices and exchange rates will be implemented by March 31, 2001. The new pricing system, to be reviewed by the World Bank and the Fund, will be based monthly on the average of the FOB-MED prices prevailing from the first to the
twenty-fifth day of the preceding month, converted into CFA francs at the average CFA francs-U.S. dollar exchange rate prevailing during the same period and raised by the transportation cost and the applicable taxation.

20. The adoption of the audited budget review acts (lois de règlement) for the years 1995 through 1998 constitutes a structural performance criterion at end-March 2001.

Reporting requirement

21. Data on the taxation of the petroleum sector will be provided monthly within four weeks following the end of each month, including (i) the price structure prevailing during the month; (ii) the detailed calculation of the price structure, going from the FOB-MED price to the retail price; (iii) the volumes purchased and supplied to the domestic market by the petroleum distributor (SONABHY); and (iv) the breakdown of receipts from the taxation of petroleum
products—customs duties, tax on petroleum products (TPP), and VAT—and of subsidies.

III. Quantitative Benchmarks

22. The program also includes quantitative benchmarks on current government revenue, the civil service wage bill, and total current expenditure.

23. Current government revenue is defined as tax revenue, plus nontax revenue, excluding the revenue collected through treasury checks.

24. Total current expenditure is defined as the difference between total budgetary expenditure, on one hand, and total capital expenditure and net lending, one the other. Capital expenditure is defined as the sum of investment spending identified as such in the national budget and foreign financed investment outlays.

25. This information will be provided to the IMF monthly within four weeks following the end of each month.

IV. Structural Benchmarks

26. The program also includes two structural benchmarks: the adoption by the Council of Ministers of the letter of development policy of the energy sector including the regulatory framework for the electricity sector and the plan for the privatization of SONABEL is a benchmark at end-December 2000; and the finalization of the interconnection between the payroll and civil service databases is a benchmark at end-June 2001.

V. Additional Information for Program-Monitoring Purposes

A. Public Finances

27. The government will report to IMF staff the following:

  • a monthly table of government financial operations (TOFE) and the 13 customary appendix tables, to be provided monthly within three weeks (provisional version) and within six weeks (final version) following the end of each month; if the data on actual public investment financed by external grants and loans are not available in time, a linear estimate based on the annual projection will be adopted;
  • complete monthly data on domestic budgetary financing, to be provided within six weeks following the end of each month;
  • quarterly data on implementation of the public investment program, including details on financing sources, to be provided quarterly within six weeks following the end of each quarter;
  • monthly data on debt service, to be provided within four weeks following the end of each month; and
  • monthly data on the resources and use of the treasury's special account created for the use of the resources from the debt service savings under the HIPC Initiative, to be provided monthly within six weeks following the end of each month.

B. Monetary Sector

28. The government will provide the following information within eight weeks following the end of each month:

  • the consolidated balance sheet of monetary institutions and, as appropriate, balance sheets of selected individual banks;
  • the monetary survey, six weeks after the end of each month for provisional data, and ten weeks after the end of each month for final data;
  • borrowing and lending interest rates; and
  • customary banking supervision indicators for bank and nonbank financial institutions—as needed, indicators for individual institutions may also be provided.

C. Balance of Payments

29. The government will provide the following information:

  • any revision to balance of payments data (including services, private transfers, official transfers, and capital transactions) whenever they occur; and
  • preliminary annual balance of payments data, within nine months following the end of the year concerned.

D. Real Sector

30. The government will provide the following information:

  • disaggregated monthly consumer price indexes, monthly within two weeks following the end of each month;
  • provisional national accounts, no later than six months after the end of the year; and
  • any revision in the national accounts.

E. Structural Reforms and Other Data

31. The government will provide the following information:

  • any study or official report on Burkina Faso's economy, within two weeks following its publication; and
  • any decision, order, law, decree, ordinance, or circular with economic or financial implications, upon its publication or, at the latest, when it enters into force.

F. Summary of Main Data Requirements


Type of Data

Tables

Frequency

Reporting Lag


Real sector

Provisional national accounts

Annual

Six months after year's end

 

Revisions of national accounts

Ad hoc

Eight weeks following revision

 

Disaggregated consumer price index

Monthly

End of month + two weeks

Public finances

Net treasury position with the
central bank

Monthly

End of month + six weeks

 

Table of government financial operations (TOFE) and the 13 usual appendix tables

Monthly

End of month + three weeks (provisional)
End of month + six weeks (final)

 

Execution of investment budget

Quarterly

End of quarter +six weeks

 

Petroleum product pricing formula, tax receipts on petroleum products, and subsidies paid

Monthly

End of month + four weeks

 

Status of the Special Status account at the treasury handling the use of the resources from the HIPC Initiative

Monthly

End of month + six weeks

Monetary and financial data

Monetary survey

Monthly

End of month + six weeks (provisional)

End of month + ten weeks (final)

 

Consolidated balance sheet of monetary institutions and, as needed, balance sheets of individual banks

Monthly

End of month + eight weeks

 

Borrowing and lending interest rates

Monthly

End of month + eight weeks

 

Banking supervision ratios

Quarterly

End of quarter + eight weeks

Balance of payments

Balance of payments

Annual

End of year + nine months

 

Revised balance of payments data

Ad hoc

When revisions occur

External debt

Outstanding external payment arrears and repayments (if applicable)

Monthly

End of month + six weeks

 

Details of new external borrowing

Monthly

End of month + six weeks



1 In the 1999 program, the retroactive salary payment made in the framework of the civil service reform was reclassified as arrears payments. The 2000 program included a benchmark of domestic payments arrears to cover these payments (CFAF 1 billion at end-September, and CFAF 2 billion at end-December); these benchmarks have been met.
2 In 1999, as a measure to improve the taxation of the informal sector, the government introduced a withholding tax on imports or purchases from wholesalers creditable against the income tax.
3 In compliance with WAEMU guidelines, the basic balance (defined as total revenues, excluding grants, less total expenditures excluding foreign-financed investment expenditure) will become the main tracking indicator from 2001 onward.
4 See EBS/00/128, 6/30/00: "Limits on External Debt on Borrowing in Fund Arrangements - Proposed Changes in Coverage of Debt Limits."
5 See paragraph 2 above.

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